My finances, my projects, my life
March 3, 2025

What is your level of personal debt?

  Compiled by myLIFE team me&myFAMILY February 18, 2025 509

If you are for example repaying a mortgage or a consumer loan, you are considered to be in debt. But do you know your level of debt? What exactly is it, how do you calculate it, and what should you be aware of to avoid falling into over-indebtedness?*

What is indebtedness?

Indebtedness refers to the act of repaying one or more loans in a controlled manner. Although it can involve any type of debt to be repaid, indebtedness generally refers to a situation where an individual has taken out a mortgage and/or a consumer loan and is repaying it to the bank. It is a common situation, often necessary to finance large projects (renovations, purchasing a car, a home, etc.).

Indebtedness is not negative as long as it remains controlled. It should not be confused with over-indebtedness, which means being unable to meet one’s obligations due to excessive debts or a lack of income.

Knowing your debt level will help you assess the health of your finances.

Why calculate your debt level?

Knowing your debt level will help you assess the health of your finances. With this indicator, you will determine if your financial situation allows you to take out a loan without jeopardizing the balance of your budget. It gives you a clear idea of the portion of your income that is allocated to the repayment of your loan(s).

In order to measure it, you can calculate the ratio between your income and your expenses, which is called the debt ratio. A debt ratio of 25%, for example, means that 25% of your income is used to repay your recurring fixed expenses.

The debt ratio is also one of the criteria considered by your bank to assess your ability to repay a loan.

    • The lower your debt ratio, the more capacity you will have to ensure the repayment of new installments and the more likely you are to obtain a loan.
    • Conversely, the higher your ratio, the more you risk encountering difficulties in meeting your repayments and maintaining your standard of living. In this case, financing from your bank may be more difficult to obtain.

In principle, credit institutions consider that the debt ratio should not exceed about one-third of income (33%, 35%, or even 40% depending on the banks). Beyond that, they may consider it risky for you and for them to lend you money.

However, it is possible to exceed this threshold. Indeed, the debt ratio is not the only element examined by the bank to assess your borrowing capacity. It will also study your family situation (the number of people in your household compared to your income) and the amount of money you will have left once all your expenses are paid. What is called “disposable income” is increasingly becoming a determining factor for the granting or not of a new loan. It is this disposable income that should allow you to cover essential current expenses such as food, transportation, or certain services like childcare. This disposable income must be sufficiently high to maintain your quality of life.

Good to know: if you are considering taking out a loan, but your debt ratio is too high, discuss it with your financial advisor. To reduce your burden, identify with him the options to lower the cost of your loan. You can, for example, negotiate the interest rate or extend the repayment period. However, do not commit if taking out a loan requires too much financial effort. Also, consider the possible fluctuation of interest rates if your loan has a variable rate.

 Debt ratio = (monthly fixed debts / net monthly income) x 100.

How to calculate my debt ratio?

Calculating your debt-to-income ratio is simple. Just add up your recurring monthly debts, then divide the obtained number by your net monthly income, and finally multiply the result by 100:

Debt ratio = (monthly fixed debts / net monthly income) x 100

The income and expenses considered for the calculation may vary according to financial institutions, but in principle, they consider the following data:

    • Monthly income: salary, pension, non-salaried professional income, alimony, family allowances, etc.
    • Monthly fixed expenses: instalments of your current loans (mortgage, car loan, consumer credit) and rent if you are a tenant.

Other expenses (water and energy bills, insurance, taxes, phone subscriptions, etc.) are generally not included in the calculation of the debt ratio. However, the bank takes them into account when assessing your overall financial situation.

To help you evaluate your debt ratio, you can use the online simulator offered by the Over-indebtedness Information and Advice Service (SICS) of the Medical-Social League.

Example

Gary and Monica are married. They are considering taking out a mortgage for the apartment they have spotted near the border. They are already repaying a car loan and would like to be able to combine the two loans. Before going to see their banker, they can calculate their debt-to-income ratio to get an idea of their financial situation.

Together, they earn a net monthly income of €9,000. They are already repaying a car loan with monthly payments of €500. After running a simulation on the bank’s website, they think they will have to repay around €2,400 per month for their mortgage. This brings them to a total amount of €2,900 in expenses (€500 for the car loan + €2,400 for the mortgage). Their debt-to-income ratio is therefore (2,900 / 9,000) x 100, which is 32.22%.

Although they are below the threshold of a third of their income, before accepting or rejecting their request, the banker will evaluate with them the credit conditions (amount of their contribution, loan duration, and interest rate) and their disposable income.

In addition to the ancillary expenses related to the property, all other costs they incur should not be neglected: water, electricity, insurance, taxes, transportation, phone subscriptions, etc. These can indeed represent a large part of their budget at the end of the month. The bank must therefore take this into account and ensure that the money remaining after paying their expenses allows them to continue living in good conditions.

Borrowing to invest

Taking out one or more loans can represent an investment strategy that involves investing in an asset a larger sum of money than one actually possesses. In other words, it involves going into debt to increase one’s investment capacity. This is referred to as leveraged investment.

The most common example is rental property investment. The investor borrows money to acquire a property, which is then rented out. The rent received is used to pay the monthly instalments.

If the credit conditions are good and the market is favourable (low borrowing interest rates, increase in the property’s value over time, etc.), the investor will make a capital gain upon resale. The gain will be even greater if only a limited initial capital was invested.

Conversely, if the market is unfavourable or unforeseen events occur (sharp rise in interest rates, drop in housing prices, unpaid rents, major repairs, etc.), the risk of financial loss is very real.

Indeed, to be profitable, the cost of credit must not exceed what it yields. The risk in this type of investment financed by borrowing is that the leverage effect can have a multiplier effect: it can amplify gains, but also losses.

Therefore, it is important to be cautious and ensure that you have the financial means to withstand potential losses.

What should you be careful about to avoid over-indebtedness?

Having loans to repay or going through a rough financial patch does not make you over-indebted. It is when these difficulties start to persist over time that you need to be cautious.

Over-indebtedness is when income no longer allows one to meet monthly payments, current expenses, bills, etc., for a period of more than 6 months.

According to the SICS, over-indebtedness is when income no longer allows one to meet monthly payments, current expenses, bills, etc., for a period of more than 6 months. Also according to the SICS, if your debt ratio exceeds 30%, you need to remain vigilant, and the closer you get to 60%, the higher the risk of over-indebtedness.

However, it all depends on the level of your income and what you have left to live on after paying all your expenses. If you earn €3,000 per month and have a debt ratio of 50%, you will have more difficulty meeting your financial obligations than someone with a 50% debt ratio but earning €8,000 per month. Very low incomes can already be in a situation of over-indebtedness with a debt ratio of only 20% or less.

Over-indebtedness does not only affect people with low financial means. It can affect anyone and be the result of a decrease in income, job loss, divorce, illness, death, etc. It can also be the result of poor financial management or excessive or inappropriate use of credit. Be particularly careful with the use of revolving credits, which often come with (very) high interest rates.

To avoid finding yourself in a difficult position, it is important to closely monitor your finances and establish a budget. Taking out a credit protection insurance is also highly recommended to ensure your repayment ability in case of life accidents.

If you find yourself in a risky situation, try to change your consumption habits, identify non-essential expenses, and above all, refrain from taking out new loans. Talk to your bank advisor to explore the solutions available to you (credit buyback, rate renegotiation, etc.).

Finally, if you feel overwhelmed, do not hesitate to contact the SICS for advice and support. Don’t wait until it’s too late! Find more information in the article: Avoiding over-indebtedness.

* Content translated from French by the BIL GPT AI tool